The constitutionality of the CFPB’s structure was front and center at this past Tuesday’s oral argument in PHH Corporation et al. v. CFPB before the U.S. Court of Appeals for the D.C. Circuit. The case involves PHH’s appeal from Director Cordray’s June 2015 decision affirming an administrative law judge’s recommended decision that concluded PHH had violated the referral fee prohibition in Section 8 of the Real Estate Settlement Procedures Act (RESPA). PHH’s appeal of the ALJ’s decision to Director Cordray represented the first appeal of a CFPB administrative enforcement proceeding.

In its appeal to the D.C. Circuit, in addition to arguing that Director Cordray’s RESPA interpretations are contrary to law, PHH argues that the CFPB’s RESPA enforcement action against it is void because the CFPB’s structure violates the U.S. Constitution’s separation of powers principles. More specifically, PHH argues that the Dodd-Frank Act’s placement of sweeping legislative, executive, and judicial power in the hands of a single director who is not accountable to the President or Congress makes the CFPB’s structure unconstitutional. In particular, PHH points to the President’s ability to remove the CFPB Director only “for cause” and the funding of the CFPB through the Federal Reserve rather than the congressional appropriations process.

Last week, the three members of the D.C. Circuit panel before whom the case would be argued signaled their interest in PHH’s constitutional argument by issuing an order directing the parties to be prepared to address two questions at oral argument. One question asked what independent agencies “now or historically have been headed by a single person” removable only for cause and the other asked what the appropriate remedy would be if such a structure is unconstitutional. In particular, the panel asked if the appropriate remedy would be to sever Dodd-Frank’s for-cause provision. The order was widely viewed as an ominous sign for the CFPB, with many observers noting that all three panel members were appointed by Republican Presidents.

Only two panel members, Judge Brett M. Kavanaugh and Judge A. Raymond Randolph, attended the oral argument. Although Judge Karen L. Henderson was not present, the court announced that she would consider the case based on the audio recording of the oral argument.

At the oral argument, PHH’s counsel described the CFPB as a “super-executive agency” whose authority is only checked by the courts. In response to a question from the panel asking whether the CFPB would be constitutional if the President could remove the Director other than for cause, PHH’s counsel responded that the absence of Congressional control over the CFPB’s funding, as well as other concerns such as the Director’s ability to hire and fire CFPB employees and set salaries, would continue to make the CFPB unconstitutional. When asked what the remedy should be if the CFPB’s structure is unconstitutional, PHH’s counsel indicated that it was “exceedingly important” for the court to address the substantive RESPA issues raised by the case because of their significance to the entire mortgage industry.

He went on to tell the panel that if he “was in your shoes,” he might be “tempted” to write an opinion stating that Congress cannot create an agency that ignores all separation of powers rules. He also indicated that it would not be appropriate for the court to sever Dodd-Frank’s for-cause provision and send the case back to Director Cordray for reconsideration. Instead, according to PHH’s counsel, Director Cordray could not continue as Director and someone else “will have to be appointed to an agency that Congress should come back and create in a constitutional way.”

The CFPB was represented at the argument by Lawrence DeMille-Wagman, Senior CFPB Litigation Counsel. One of the judges observed to Mr. DeMille-Wagman that there were few precedents for an agency headed by a single individual removable only for cause as contrasted with a multi-member commission whose members are removable only for cause. Mr. DeMille-Wagman argued that Congress can choose how an agency’s leadership is structured and disputed PHH’s contention that the President’s removal power can only be limited for agencies run by a multi-member commission. When asked if the appropriate remedy would be to sever Dodd-Frank’s for-cause provision if there is a separation of powers violation, Mr. DeMille-Wagman, unlike PHH’s counsel, agreed that severance would be appropriate so that the case could be reconsidered by Director Cordray, who would then be removable by the President without cause.

Because the Judges seemed to be hostile to the CFPB’s defense of its constitutionality, it appears likely that the court will invalidate Director Cordray’s order on at least that basis. The greatest uncertainty at this point relates to what remedy the court will fashion. The panel’s decision is unlikely to be the final word, however, since the CFPB can be expected to seek a rehearing en banc by the D.C. Circuit (on which the majority of active judges are Democratic appointees) and/or seek review from the U. S. Supreme Court.

Practice Leaders

ABOUT THE CFS GROUP

The Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance, including pioneering work in pre-dispute arbitration programs.
Read More